Mongolia to Take Action to Address Corruption

During its regular session on March 14, 2024, the Cabinet of Mongolia made a significant step forward in the fight against corruption by supporting the submission of a draft Resolution to the State Great Khural of Mongolia for approval.

The draft Resolution outlines the implementation of an Action Plan for the Implementation of the National Anti-Corruption Program. the Resolution aims to establish an effective legal framework to combat corruption and encourage public trust in government. The newly proposed resolution for implementing the national anti-corruption program is a much-needed initiative to address the misuse of power and authority.

The draft Resolution outlines 290 measures to be implemented between 2023 and 2030, aimed at achieving the 11 goals and 48 objectives of the National Anti-Corruption Program, as set out in 2023 Resolution No. 59 of the State Great Khural. The success of this program hinges on the active participation and cooperation of all stakeholders, including the public and private sectors, civil society organizations, international organizations, the media, and citizens. The anticipated outcomes of this program are promising. A yearly decline in corruption levels is expected under the plan, leading to an expanded state budget, increased public trust in public organizations, rising citizen income, and a strengthened culture of zero tolerance for corruption. Furthermore, a more robust whistle-blowing system will be established, providing a crucial avenue for reporting and addressing corrupt activities.

Official corruption is a pervasive problem in many Asian countries, undermining the rule of law, hindering economic development, and eroding public trust in institutions. Corruption takes various forms, including bribery, embezzlement, nepotism, and cronyism. It affects all levels of government, from local administrations to national agencies, and can influence decision-making in areas such as business regulations, public procurement, and law enforcement.

The consequences of official corruption are far-reaching. It distorts markets, creating an uneven playing field for businesses and discouraging foreign investment. It also undermines the delivery of essential public services, such as education, healthcare, and infrastructure. Corruption can lead to inefficiencies, waste, and misallocation of resources, further exacerbating poverty and inequality. Moreover, it can fuel social unrest and political instability, as citizens become disillusioned with their governments and demand accountability.

The root causes of official corruption in Asian countries are complex and multifaceted. Some of the key factors include weak institutions, lack of transparency and accountability, and cultural norms that tolerate or even encourage corrupt behavior. In many cases, low salaries and inadequate resources for public officials create incentives for them to engage in corrupt activities. Additionally, complex regulatory systems and opaque decision-making processes can create opportunities for corruption to thrive.

What is the Capitalization Requirement for a new Foreign-Owned Company in Mongolia?

Our team of Mongolian lawyers regularly field questions related to Mongolia’s capitalization requirements for the establishment of a new Mongolian company.

Mongolian law requires payment of at least USD $100,000 in capitalization funds per foreign shareholder when establishing a foreign owned company in Mongolia. This means a company established by a single foreign shareholder will be required to pay-in at least $100,000, while a company established by two foreign shareholders must pay at least $200,000. This requirement is the same whether the shareholder is a foreign individual person, or a legal entity.

A frequently asked question is what are the permitted uses of these funds after the company is successfully established. The good news is that once the company has been formally registered and operations commence, the initial capitalization funds will be available for normal use by the company in connection with the company’s expenses and liabilities incurred in the course of operations. The government of Mongolia, generally does not track how these capitalization funds are used. With the right contractual arrangements in place, the new Mongolian company will even be able to remit a significant portion of the initial capital back to the foreign shareholder/s.

Prospective investors should note however that in the event the Mongolian entity encounters difficulty, it will be legally liable up to the $100,000 threshold, regardless of whether that initial payment remains on the company’s books, or has been spent or remitted abroad.

It is important to note that where the total foreign ownership of a company is lower than 25% the company will not be considered foreign owned for the purposes of Mongolian law, and the $100,000 capitalization requirement per foreign shareholder will not apply. As a result, it is common for foreign investors interested in entering Mongolia to work with a local partner holding 76% of a new Mongolian entity, while the foreign side holds only a minority 24%. In some cases this arrangement works well, while in others differences in strategy or management style between the foreign investor and the Mongolian partner may lead to disagreements. When considering a prospective joint venture of this kind, care must be taken to structure the legal documentation appropriately to best protect the foreign shareholder.

Another model we have encountered is a “Nominee Shareholder” arrangement. In this structure, the foreign investor reaches an agreement with a Mongolian national individual or company to establish and hold the equity in a Mongolian entity while acting on behalf of the foreign investor. This model can be effective and is permitted by Mongolia laws, however this structure carries significant potential risk in the event the wrong Mongolian Nominee is selected. As the Nominee Shareholder will have full control over the Mongolian company operations and management care must be taken in the selection of the Mongolian side, as well as in putting in place the appropriate legal agreements to limit the Nominee Shareholder’s authority to act and to maximize the foreign investor’s rights to recover from the Nominee.

Setting up a Company in Mongolia

Establishing a new company in Mongolia is relatively easy, however as with any country, there are unique legal and business practices which require careful consideration and planning.

There are four steps to establishing a company in Mongolia.  Firstly, a name for the new company must be formally registered, along with sector in which the company will operate.

This can be done via filing an application for reservation of the legal entity’s name with the Legal Entity Registration Office (LERO). LERO will verify and confirm the proposed name of the new company by checking it for similarities with other previously registered corporate names. LERO will confirm the name of the new company if it is not too similar to the name of an existing legal entity. A newly confirmed name will be reserved for 10 business days.

Secondly, a bank account must be established in the name of the new company. For a new company established by one or more foreign shareholders totaling at least 25% of ownership of the Company, USD $100,000 must be deposited into the account for each foreign shareholder. This is a legal requirement and not optional.

Thirdly, the company must be formally registered with the LERO. LERO will decide whether or not to register the new company 10 working days after receiving application documentation for a foreign invested company.

The final step will be to obtain a formal company seal (stamp) for the new company. The stamp will be used to execute contracts and official documentation. After each of these steps has been completed, the new company is ready to start operations.

Our Mongolian lawyers have successfully established companies in Mongolia for a variety clients in various business sectors. We are also able to provide registered address services, document management services, accounting and payroll services, tax preparation and reporting services.

What is the difference between Salary and Remuneration?

Under the Labor Law, an employee’s remuneration consists of base salary, additions, additional pay, vacation pay, bonuses and incentives.  

Additions are paid to certain employees depending on specialty rank or degree, abnormal working conditions or responsibilities, as well as for utilizing the employee’s high professional skills or work experience in respect of Contract employees. Additions could also include similar additions provided by law, collective agreement or internal policies. 

Additional pay includes overtime pay, pay for performing work outside the scope of one’s job duties or job position (including simultaneously or in combination with the current job), pay for substitution of another employee, and other similar additional pay stated in law, collective agreement or internal policies (work rules). In respect of Contract employees, additional pay may be paid on the basis of work results.

Bonuses and incentives are paid for the employee’s work result or contribution to the company’s achievement, which include bonuses, one-time monetary incentive for completing a certain special task, and other monetary incentives paid pursuant to law, agreement or internal policy. The remuneration does not include the following: 

      - all types of statutory benefits, including for pregnancy and maternity leave, loss of working ability, unemployment, pension etc. 

      - reimbursements; and 

      - allowance income, including for transportation, fuel, housing and meal discounts.

The remuneration structure above applies to expats employees under contracts as well.

New Law on Social Insurance Comes Into Effect January

The General Law on Social Insurance (“GSI law”) was approved by the Mongolian Parliament on July 7, 2023, and it will take the place of the Law on Social Insurance (1994) as of January 1, 2024. The law intends to enhance the administration and structure of the social insurance and pension systems , and control late payments and report resubmissions, among other things.

In this blog we will share an overview of key changes of the GSI Law and certain amendments to recognize for businesses and employers.

Under the new Law, the following amendments were made to expand the coverage of social insurance, to move from the distribution system to a semiconducting system, to reduce future losses in the insurance fund, and to initiate actual collection of pension insurance funds.

– From 2030, the insurer will be able to spend monetary asset from initial account on education, health care and mortgage repayments;

– A certain amount of the monetary assets from the initial account will be inherited by the insurer’s legal heirs;

– The government will pay for the insurance contribution of parents who has a child under medical supervision and permanent care;

– The maximum monthly income for voluntary social insurance is equivalent to an increase of 7 times that of the minimum wage rate.

Additionally, it should be noted that the following changes were made in relation to rights and obligations of the employers and businesses.

– the social insurance contribution to pay from an employer is slightly changed. The rate of manufacturing accidents and occupational-related disease insurance was reduced to 0.5-2.5 insurance and the rate of unemployment insurance increased as 0.5;

– An employer shall have the obligation to compensate and employee for social insurance contribution if it is found that an employer has not paid the income of social insurance for a period, has hidden, reduced rates, underpaid, and wrongly dismissed by employee.

– employees who are working for another employer under employment contract in addition to their full-time principal employer or under the contract shall be insured compulsorily for only pension insurance;

– foreign entities earning a source of income from Mongolia are obliged to pay and report social insurance contribution.

Basics of Agent/Principle Law in Mongolia

A citizen or a legal entity may grant other another person authority to perform certain legal actions on his or her behalf, in accordance with law or on the basis of an appropriate authorization. The appointed representative, or “Agent”, has a duty to perform the designated activity on behalf of the entrusting party, the “Principal” within the authority delegated by the Principal, and the rights and obligations that arise from it belong only to the Principal.

Agent or representative of this kind may be a citizen or legal entity with full, partial, or limited civil law capability.

A written authorization must comply with certain legal requirements. A written authorization not meeting these requirements shall be invalid:

  • be signed by principal, and legal entity’s authorization shall be signed by executive and attached with chops or seal on it;
  • authorization entitling to receive, or transfer, or administer juristic person’s assets shall be signed by the accountant beside executive;
  • issued date shall be indicated;
  • if provided by law, it should be certified by notary;
  • if authorization was issued for certain period of time, the duration should be indicated.

Authorization shall be issued for a specific period of time or without a certain time. The power of authorization issued for a certain period of time must be no more than three years, authorization issued without a specified time shall be valid for up to one year period from the date of issuance.

Personal Data Protection in Mongolia

In the 26 years since the Personal Secrets Law was enacted in 1995, legal revise and reform for personal data protection was required due to changes in social interactions and digital transition. Therefore, on December 17, 2021, the Parliament adopted a new Law on the Personal data protection (PDPL), which began to be implemented on May 1, 2022.

This law applies to all individuals, legal entities and organizations without legal status collecting, processing, using and protecting personal data in Mongolia. Under the previous Personal Secrets Law, only the data subject was responsible for the security of his/her information but now the PDPL provides that the data controller and collector are obliged to ensure information security and protect personal data as well.

Personal data protection is categorized as personal information and sensitive information and it is defined as below.

  • Personal data means sensitive data, first and last name, date and place of birth, residence address, location, ID number, assets, education, membership, online identifier, and other information that directly or indirectly identifies a person or makes it identifiable;
  • Sensitive data encompasses a person’s race, ethics origin, religion, beliefs, health, correspondence, genetic and biometric information, digital signature private key, information on whether an individual is serving or served any sentence, sexual orientation, gender identity, expression, and information about sexual intercourse.

When governmental authorities or legal entities collecting, processing, and using personal data, the data owner’s consent must be obtained in writing or electronically. Unless otherwise allowed by law or a convention to which Mongolia is a party, it is forbidden to transfer personal data outside of Mongolia without the consent of the data subject. Transferring personal data from one group company to another in oversees would be considered a personal data transfer because the legislation does not allow an exception to this rule of permission.

The data processors and controllers are required to undertake data security assessment. When data is collected, processed, and used electronically, it is especially important to conduct a data security assessment in the following situations:

  • when making decisions that have an impact on the rights, freedoms, and legitimate interests of the data subject;
  • when processing sensitive data on a regular basis.

the National Human Rights Commission (NHRC) is responsible to review and recommend for assessment whether data shall be collected, processed and used using electronic data processing technology.

Moreover, data controller shall keep a record of the response taken to eliminate the violation and its negative consequences. The record shall be submitted to the NHRC in January of each year or as requested.

Protection of Newly Created Plant Varieties in Mongolia

Following a process of technical consultations with the Food and Agriculture Organization of the United Nations and the International Union for the Protection of New Varieties of Plants, Mongolian Parliament enacted the Law on Seeds and Varieties of Plants on October 15, 2021 to regulate issues related to supporting the development of the sector of crop seeds, stimulating research and innovation in the seed sector, establishing fair trade of seeds, protection and sustainable use of plant genetic resources, creation of new plant varieties, protection of breeder’s rights and ensuring food safety.

In specifically, this law regulates the registration of a new plant varieties and the protection of the breeder’s rights. Any person who produces, sell, export and import a registered and protected plant varieties is required to obtain permission from a breeder. The protection of breeder’s right is valid for 20 years for plants and 25 years for trees and climber plants.

Ministry of Food, Agriculture and Light Industry is entitled to register a new variety plant in Mongolia and to protect breeder’s right. In determining whether or not the breeder is entitled to apply a new variety plant registration, the Minister of Food, Agriculture and Light Industry should identify that the plant is new, various, identical and stable by doing necessary field experiments and laboratory tests. These four requirements are described as below.

New – the seed and plants variety are considered new if it is not sold or distributed throughout a certain time prior to the request date:

  • 1 year ago, in the territory of Mongolia;
  • four years ago, in the territory of other countries and six years ago for trees and shrubs.

Various – if the newly created variety differs clearly from other popular varieties at the time of the request, it is considered to be different.

Identical – if the basic characteristics of the variety are sufficiently maintained during changes that may depend on the characteristics of the reproductive structure, then the seed is considered an identical variety.

Stable – After repeated reproductive cycles, if the basic characteristics of the seed do not change at the end of a specific cycle, the seed is considered a stable variety.

Therefore, it is significant to first clarify whether a plant variety can be considered as a new variety plant in Mongolia, whether breeder’s plant variety sold or distributed before in Mongolia and oversees during period mentioned above.

Invalidating a Mongolian Trademark

In the past weeks the firm’s Mongolian lawyers have been approached with an inquiry regarding the possibilities to request trademark invalidation in Mongolia.

Registration of trademarks can be invalidated by a request filed with the Dispute Resolution Committee (DRC). There are several acceptable reasons for trademark invalidation.

Any interested person may submit to the DRC a request for invalidation of a trademark registration on the ground of followings:

  • Trademark is registered in violation of registration requirements;
  • The trademark is registered in the member country of Paris Convention under name of any representative of distributor without permission of rights owner of the given trademark;
  • A trademark owner hasn’t used the trademark for 5 years without any reasonable excuses.

Such an invalidation request is acceptable in Mongolia if it was submitted within one year from the date on which the registration of the conflicting trademark was published by the Intellectual Property Office. The DRC with the authority to decide whether or not a trademark is invalid within 6 months from the date of receipt and notify it to petitioner.

Although Mongolian Trademark law provides any interested person to dispute about trademark registration validity within specific reasons, a one-year limit for a request submission is too short. After this time frame has passed, it becomes more difficult to invalidate trademark registration based on a request of likelihood of confusion.

The Paris Convention for the Protection of Industrial Property (Paris Convention) which is ratified by Mongolia, provided longer time limit for filing a trademark invalidation request. For example, article 6bis of the Paris Convention entitles the owner of a well-known mark to file an invalidation request of conflicting trademark in 5 years from the date on which the registration of the conflicting trademark was published. Therefore, a period extension for invalidation request is required for the purpose of harmonizing Mongolian law with international treaty.

Obligation to Report Beneficial Owner

Does a new Mongolia company have to register their beneficial owner’s information with Mongolian authorities?

Mongolia revised the General Tax Law in 2019, and the article 18 of the law regulates the exchange of taxpayer information with other countries that have the international agreement, treaty or convention (Agreement) concluded with Mongolia. Among those exchanges is information of the legal entity’s beneficial owner.

Therefore, Mongolia has implemented a policy to create database of beneficial owner’s information of companies in order to provide opportunities to enhance cooperation between the State Registration Authorities and the Tax Organization as well as to exchange information for tax purpose with other countries that have the agreement with Mongolia.

In this connection, additional amendments to the Law on State registration of a legal entity were adopted which requires all registered legal entities in Mongolia to register information about their beneficial owners at the Legal Registry of the General Registry of Mongolia. Also, new establishing companies is entitled to register the company on the basis of the requirement to register their beneficial owner’s information.

Under the Law on Combating money laundering and the financing of terrorism and the Law on State registration of a legal entity, a beneficial owner is a person who has a significant or controlling ownership interest solely or jointly with others of holds a management function of the legal entity or is represented by other persons or ultimately owns the legal entity earning benefit and profit by exercising control of the legal entity, its transactions and arrangements to implement the transactions.

To summarize the above, newly founded company is obliged to register beneficial owner’s information with the state registration authority with an application to register a company.